Addis Ababa University College of Business & Economics

School of Commerce

MA in Project Management Program Module: Project Identification, Analysis & Appraisal

TMA 02

1.The market price of land used in financial analysis of projects is different from the shadow price (economic value) of land to be used in economic evaluation of projects. What are the principal reasons for the differences between the market price of land and shadow price of land? Explain how the land cost would be determined in economic evaluation of a manufacturing project if the land is to be used as factory site.

2.Fana Farms PLC is planning to establish a new animal fattening business at East Shewa Zone of the Oromia Regional State. As a member of the feasibility study team, you have been given the following raw data for your analysis:

Land of 20 hectares will be obtained from the government on a lease basis for annual rental payment of Br800,000 payable at the beginning of each year over term of the lease. The lease satisfies the conditions for lease (IFRS 16) & the lease term is 5 years.

Of the land to be acquired, 10% will be used for herd purpose while the remaining will be green area for various types of plantation. The project will require construction works of Br4,000,000 with 70% probability & Br5,000,000 with 30% probability. Machinery and equipment will be acquired for Br800,000 with 60% probability & Br600,000 with 40% probability (both to be depreciated over 5 years). The table below contains project details with 75% probability.

Explanation Year 1 Year 2 Year 3 Year 4 Year 5 Oxen for butchery 400 450 450 500 400 Price per ox (on average) Br16,000 Br18,200 Br20,000 Br22,000 Br24,000 Price of meat/kilo Br300 Br340 Br360 Br360 Br400 Price of byproducts/kilo Br100 Br100 Br120 Br120 Br140 Total Human resources Br80,000 Br92,000 Br100,000 Br120,000 Br160,000 costs Utilities expenses (per Br20,000 Br22,000 Br24,000 Br28,000 Br30,000 bill) Miscellaneous expense Br16,000 Br20,000 Br24,000 Br30,000 Br40,000 (including supplies)Type of feed Kg/cattle/day Cost/kilo (60% Cost/kilo (40% 50% 50% Probability) Probability) prob prob Green matter 3.5 Br3.00 Br4.00 Concentrate 7 6 Br12.00 Br13.00